The appeal of cash and cash alternatives remains strong in the wake of January’s economic data that gave hints that inflation could be stickier than anticipated. Should the Fed need to raise rates further than the two 0.25% increases currently predicting, the potential impact on equities could be even larger than what markets are pricing for, increasing the risk of recession and pushing many investors to position their portfolios defensively.
During times of economic drawdown and recession, the adage that “cash is king” tends to ring true for many advisors and investors who look to pad their portfolios with larger cash and cash alternative allocations than they would during periods of strong growth.
Cash and cash alternatives are appealing for the liquidity they offer and the stability they can provide when equities and/or bonds are underperforming. They’re seen as a safety net of sorts, and advisors are already putting cash allocations to work for them through funds like the NEOS Enhanced Income Cash Alternative ETF (CSHI).
CSHI is an actively managed ETF to consider that’s offering a distribution yield of 5.54% as of January 31, 2023. The fund launched in August 2022 and is already garnering attention: year-to-date it’s already brought in $12.5 million in net flows.
It’s an options-based fund that is long on three-month Treasuries and also sells out-of-the-money SPX Index put spreads that roll weekly to account for market changes and volatility. It seeks to deliver 100–150 basis points above what 90-day Treasuries are yielding while also taking advantage of tax-loss harvesting opportunities and the tax efficiency of index options.
The put options that the fund uses are not ETF options but instead are S&P 500 index options that are taxed favorably as Section 1256 Contracts under IRS rules. This means that the options held at the end of the year are treated as if they had been sold on the last market day of the year at fair market value, and, most importantly, any capital gains or losses are taxed as 60% long-term and 40% short-term, no matter how long the options were held. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options.
CSHI has an expense ratio of 0.38%.
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